Why Understanding Financial Statements is Critical for Auto Repair Shop Owners

There’s one area of business where too many automotive shop owners struggle. And that is in the area of profitability. Strangely enough, many of these same struggling shop owners often have great companies, with adequate car counts, a robust customer base, great employees, and a consistent calendar booked with plenty of upcoming work. So why do so many shop owners struggle financially?

 

The reality is that many shop owners don’t pay enough attention to the financial side of their business. Understanding and reviewing financial statements is often put on the back burner. This leads to cash flow problems and reduced profits, making it difficult to pay bills, sales tax, and payroll. This also causes a lot of sleepless nights worrying.

 

Is business all about profit? Of course not. There are many components of operating and growing a successful automotive repair shop. However, attaining and maintaining adequate cash flow and profit is a responsibility all shop owners have to their companies. That responsibility also extends to their families and their employees. In this blog, I will outline the importance of understanding financial statements and explain the reasons why this is so essential to your future success.

 

The Importance of Financial Statements

For clarity, the financial statements I am referring to in this article are the Income Statement (also known as the Profit & Loss Statement) and the Balance Sheet. There are other financial reports, but these two are the most common.

 

Here is a brief overview of the income statement and the balance sheet. The income statement shows your total sales revenue (income), cost of sales, gross profit, all your operating expenses, and your net profit in a given period. It’s important to note that generating net profit (your bottom line) does not always equate to additional cash in the bank.  While a business can show a respectable net profit, having high account receivables or spending that profit in that period can affect your cash flow. In other words, it’s possible to be profitable, but yet be short on cash.

 

The balance sheet shows the financial strength of a company at a given point in time. There are three main sections to the balance sheet: assets, liability, and the owner’s equity. Simply put, assets are what you own, liabilities are what you owe to vendors and creditors, and equity is the net worth of your company; the residual value of your company after all debts are paid.

 

While understanding your financial statements is a responsibility you have as a business owner, this is not to say you need to understand them as if you were an accountant, bookkeeper, or financial advisor. However, as mentioned, reviewing and analyzing your financial statements is fundamental to your success. Additionally, there will be times when you need to discuss sensitive financial information with your accountant or bookkeeper. Not understanding your financial statements leaves too much to chance, and the results are often hidden losses that fly under the radar.

 

Understanding financial statements gives you a clear picture of the economic health of your auto repair company. This is crucial for spotting trends, making key decisions, setting your financial goals, and planning for the future of your business. Having a strong balance sheet demonstrates creditworthiness, which banks and lending companies use to determine your ability to pay back a loan.

 

Another benefit of understanding your financial statements is that you will be able to properly calculate your sales breakeven number, budget your expenses, and cut unnecessary costs. Perhaps the biggest benefit is improving cash flow. When you consistently track your financial performance, you begin to see where the cash is going. Improvements in cash flow will also prevent those sleepless nights wondering how you are going to make payroll this week.

 

Understanding financial statements takes time and requires receiving the right training. There are many books and training videos available, such as those found on the Paar Melis and Associates Website.  It may take a little time, but you’ll get there. Once you have a basic understanding, then set aside time each week to review your financials. Highlight anything that you don’t understand or have questions about. Discuss these concerns with your bookkeeper, accountant, and business coach.

 

Why It’s Not Enough to Rely on Your Business Management Program

Elite coaching clients often ask me, “I already review the financial reports from my business management system. Why is it important to also review and understand my income statement and balance sheet? A great question, for sure.

 

While your business management system provides important Key Performance Indicators (KPIs), those KPIs are related to total sales revenue and gross profit on parts, labor, and sublet work.  Most business systems will not give you all the financial information you need to properly analyze and grow your business.

 

Essentially, the financial information I am referring to is your monthly operating expenses, net profit, assets, liabilities, and equity. This critical information is found on your Income statement and your balance sheet. To be in total control of your finances requires an understanding of the KPIs generated from your business management system and the data found on your financial statements.

 

Financial Statements and Tax Planning

Most businesses do not plan properly for their tax return. Waiting for the beginning of the new year to prepare for your tax return is too late. Preparing for your tax return is an ongoing, year-long process.  By June or July of each year, you have a pretty good idea of how the year is shaping up. By October you can predict with a fair amount of certainty the sales and profits for that year. Again, this can only be done with an understanding of your financials. This is why you must review your financial statements every month and begin preparing for your tax return before the end of the year.

 

Let me give you a real-world scenario. If by November of this year, you feel that your sales and profits are significantly higher than last year, this information must be discussed with your accountant. The planning and adjustments made at this point will save you from paying additional taxes and ensure you have the money to pay those taxes. What happens too often is that this information is discovered too late, resulting in additional taxes owed to the IRS. This one fact alone should incentivize every shop owner to become more diligent in reviewing and understanding their financial statements.

 

Conclusion

If you are an auto shop owner looking to grow a more profitable company, Elite Worldwide can help. At Elite, we have world-class, experienced coaches who understand your business. Our coaches have lived in the trenches and have built amazing, successful automotive companies.

 

Elite also has sales and management training, and peer groups that can take you and your auto repair company right to the top. No matter where you are in your business career; startup, growth mode, or looking to retire, Elite can guide you and help you achieve your goals and build a more profitable and successful business.